Perhaps appropriately for a company in the rubber business, Ansell's share price over the last year has followed the trajectory of a bouncing ball, rallying off the July low to return to previous levels around the $11.50 mark.
| "... in the case of Ansell we have been monitoring the growing risks facing the company, such as increased input costs driven by the commodities boom, for some time." |
Ansell has been a solid performer since its inclusion in the Fat Prophets Portfolio in October 2001. During this time, the stock has increased by close to 200 percent, outperforming the broader market by a wide margin.
After trading at a seven month high of $11.78 during December, Ansell has begun to show signs of waning upward momentum. This is not surprising considering the extent that the shares have rallied since last July, and we believe that a period of consolidation is now probable.
As long-term value investors, short term share price volatility isn't our primary focus, but in the case of Ansell we have been monitoring the growing risks facing the company, such as increased input costs driven by the commodities boom, for some time.
As discussed in FAT280 (where we recommended Members sell-half their exposure) increasing costs and a softening US economy are likely to impact Ansell's profitability. It may surprise some Members to know that around 50 percent of Ansell's sales are in the US.
Ansell's business consists of three divisions: professional, occupational and consumer healthcare. Of these, occupational (primarily protective gloves for the food and automotive industry) accounts for around 50 percent of sales.
We believe the housing market downturn will continue to pressure consumer spending in the US this year. In the event of a slowdown, discretionary items such as eating out and new cars are often the first to go. Any US slowdown will make it difficult for Ansell to achieve revenue growth in our opinion.
Meanwhile, on the cost side, Ansell is hostage to commodity price movements via its exposure to oil and rubber (or latex). While a significant fall in these commodity prices has improved Ansell's short term earnings prospects, we do not believe low input costs are here to stay.
In the short term, lower oil and commodity prices are likely to support Ansell's share price. Moreover, the company has recently joined the endless ranks of potential takeover targets, providing further price support.
However, with a price to earnings ratio of around 16.5 times 2007 and 14.6 times 2008 consensus earnings, the market views Ansell's prospects a little too optimistically in our view. In addition, the forecast dividend yield is anaemic, at around 2.4 percent, unfranked.
Consensus Valuation Estimates
|
2007 |
2008 |
| Price to earnings ratio |
16.5 |
14.6 |
| Net dividend yield |
1.8% |
2.1% |
| Price to book value |
2.5 |
2.2 |
| Return on Equity |
15.5% |
15.4% |
Source: Bloomberg
On the charts, we believe resistance between $12.15 and $11.80 should cap the share price for now, but with the prospects for further gains limited we believe the time has come to take profits. We recommend that Members sell Ansell around $11.45.
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